<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-14155
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Unigraphics Solutions Inc.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2728894
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(State or ther Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13736 Riverport Drive, Maryland Heights, Missouri 63043
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(314) 344-5900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 10, 1999, there were outstanding 5,003,001 shares of the
registrant's Class A Common Stock, $.01 par value per share, and 31,265,000
shares of the registrant's Class B Common Stock, $.01 par value per share.
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I -- Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations....................................................................... 3
Consolidated Balance Sheets................................................................................. 4
Consolidated Statements of Cash Flows....................................................................... 5
Notes to Consolidated Financial Statements.................................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks................................................. 17
Part II -- Other Information
Item 4. Submission of Matters to a Vote of Security Holders......................................................... 18
Item 6. Exhibits and Reports on Form 8-K............................................................................ 18
Signatures................................................................................................................ 19
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share and shares amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software $ 47,667 $ 38,620 $ 88,256 $ 70,180
Services 56,390 46,378 109,163 84,263
Hardware 6,293 16,903 18,737 33,986
--------- --------- -------- ---------
Total revenue 110,350 101,901 216,156 188,429
--------- --------- -------- ---------
Cost of revenue:
Software
Amortization 6,139 5,550 12,279 10,146
Royalties, distribution and other 8,432 4,374 13,461 7,651
Services 18,680 19,836 39,272 34,562
Hardware 5,612 14,321 15,410 28,226
--------- --------- -------- ---------
Total cost of revenue 38,863 44,081 80,422 80,585
--------- --------- -------- ---------
Gross profit 71,487 57,820 135,734 107,844
--------- --------- -------- ---------
Operating expenses:
Selling, general and administrative 41,801 34,885 77,062 62,115
Research and development 16,743 15,563 33,648 29,851
In-process research and development - - - 39,440
--------- --------- -------- ---------
Total operating expenses 58,544 50,448 110,710 131,406
--------- --------- -------- ---------
Operating income (loss) 12,943 7,372 25,024 (23,562)
Other income (expense), net 1,280 (1,993) 3,498 7,699
--------- --------- -------- ---------
Income (loss) before income taxes 14,223 5,379 28,522 (15,863)
Provision for income taxes 5,118 1,936 10,266 (7,155)
--------- --------- -------- ---------
Net income (loss) $ 9,105 $ 3,443 $ 18,256 $ (8,708)
========= ========= ======== =========
Earnings (loss) per share:
Basic and diluted $ 0.25 $ 0.11 $ 0.50 $ (0.28)
========= ========= ======== ==========
Weighted average number of
Common shares outstanding:
Basic 36,265,132 31,979,286 36,265,066 31,626,111
========== ========== ========== ==========
Diluted 36,344,791 31,979,286 36,342,734 31,626,111
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and shares amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 15,897 $ 20,740
Marketable securities 3,408 8,092
Accounts receivable, net 94,986 107,379
Prepaids and other 9,167 6,383
--------------- ---------------
Total current assets 123,458 142,594
--------------- ---------------
Property and equipment, net 28,853 26,467
--------------- ---------------
Operating and other assets
Software, goodwill and other intangibles, net 65,493 72,443
Deferred income taxes 17,160 16,149
--------------- ---------------
Total operating and other assets 82,653 88,592
--------------- ---------------
Total assets $ 234,964 $ 257,653
=============== ===============
Liabilites and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 59,841 $ 59,452
Deferred revenue 12,852 12,022
Income taxes payable 51,516 39,098
Deferred income taxes - 2,771
--------------- ---------------
Total current liabilities 124,209 113,343
--------------- ---------------
Intercompany note 8,511 55,130
Stockholders' equity
Preferred stock, $.01 par value; authorized
20,000,000 shares, none issued - -
Class A common stock, $.01 par value; 168,735,000
shares authorized; 5,001,334 shares issued and
outstanding at June 30, 1999 50 50
Class B common stock, $.01 par value; 31,265,000
shares authorized; 31,265,000 shares issued and
outstanding at June 30, 1999 313 313
Additional paid-in capital 148,676 148,676
Retained earnings (deficit) (48,505) (66,762)
Accumulated other comprehensive income 1,710 6,903
--------------- ---------------
Total stockholders' equity 102,244 89,180
--------------- ---------------
Total liabilities and stockholders' equity $ 234,964 $ 257,653
=============== ===============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net Cash Provided By Operating Activities $ 50,877 $ 50,367
------------ ------------
Cash Flows From Investing Activities
Proceeds from sale of marketable securities 3,825 10,145
Payments related to Solid Edge acquisition - (104,993)
Payments for purchases of property and equipment (6,769) (5,117)
Payments for purchases of software and other intangibles (6,281) (883)
Payments for purchases of marketable securities - (51)
------------ ------------
Net cash used in investing activities (9,225) (100,899)
------------ ------------
Cash Flows From Financing Activities
Borrowing under Intercompany Credit Agreements and Note 12,461 111,204
Payments on Intercompany Credit Agreements and Note (58,957) (108,851)
Proceeds from sale of stock - 65,100
------------ ------------
Net cash provided by (used in) financing activities (46,496) 67,453
------------ ------------
Effect of exchange rate changes on cash and cash equivalents 1 (139)
------------ ------------
Net increase (decrease) in cash and cash equivalents (4,843) 16,782
Cash and cash equivalents at beginning of period 20,740 11
------------ ------------
Cash and cash equivalents at end of period $ 15,897 $ 16,793
=========== ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Unigraphics
Solutions Inc. ("Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information. In the
opinion of management, all adjustments (consisting of only normal recurring
items) which are necessary for a fair presentation have been included. The
results of interim periods are not necessarily indicative of results which may
be expected for any other interim period or for the full year. For further
information, refer to the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
Note 2. Earnings Per Share
The Company presents both basic and diluted earnings per share. Basic
earnings per share of common stock is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is calculated in the same manner as basic earnings per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding, assuming the exercise of all
employee stock options that would have had a dilutive effect on earnings per
share. Following is the calculation for both basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Net income (loss) $ 9,105 $ 3,443 $18,256 $(8,708)
--------- --------- --------- ---------
Weighted-average shares outstanding 36,265 31,979 36,265 31,626
--------- --------- --------- ---------
Dilutive effect of employee and director stock options 80 - 78 -
--------- --------- --------- ---------
Diluted shares outstanding 36,345 31,979 36,343 31,626
========= ========= ========= =========
Basic and diluted earnings (loss) per share $ 0.25 $ 0.11 $ 0.50 $ (0.28)
========= ========= ========= =========
</TABLE>
Note 3. Comprehensive Income
Comprehensive income for the three months ended June 30, 1999 and 1998 was
$7.2 million and $4.6 million, respectively. Comprehensive income for the six
months ended June 30, 1999 and 1998 was $13.1 million and $4.6 million,
respectively. The difference between comprehensive income and net income for
the three months and the six months ended June 30, 1999 and 1998 arose from
foreign currency translation adjustments and unrealized holding gains on certain
of the Company's investments.
6
<PAGE>
Note 4. Segment Information
Industry Segments
The Company's business involves operations principally in one industry
segment: providing mechanical design automation software and related services to
manufacturers for the design, engineering analysis, testing and manufacturing of
mechanical products.
Geographic Segments
The Company aggregates its operations by geographic location for management
reporting purposes. Reportable segments consist of the Americas, Europe, and
Asia Pacific. The Company uses operating income, exclusive of software
amortization costs and in-process research and development costs, to measure
segment profit or loss. The following is a summary of certain financial
information by reportable geographic segment for the three months and six months
ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 1999 June 30, 1998
--------------------- ---------------------
Operating Operating
Revenues Income Revenues Income
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Americas $ 56,687 $ 9,614 $ 50,371 $ 6,975
Europe 40,079 6,987 38,523 3,985
Asia Pacific 13,584 2,481 13,007 1,962
-------- ------- -------- -------
Total $110,350 $19,082 $101,901 $12,922
======== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, Three months ended December 31,
June 30, 1999 1999 June 30, 1998 1998
--------------------- -------- --------------------- ------------
Operating Total Operating Total
Revenues Income Assets Revenues Income Assets
-------- --------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Americas $112,551 $24,052 $159,581 $ 97,900 $16,317 $162,647
Europe 79,869 11,897 55,317 68,449 6,658 74,449
Asia Pacific 23,736 1,354 20,066 22,080 3,049 20,557
-------- ------- -------- -------- ------- --------
Total $216,156 $37,303 $234,964 $188,429 $26,024 $257,653
======== ======= ======== ======== ======= ========
</TABLE>
7
<PAGE>
Reconciliation of operating income/(loss) for the three and six months
ended June 30, 1999 and 1998 follows (in thousands):
<TABLE>
<CAPTION>
Three months ended
June 1999 June 1998
--------- ---------
<S> <C> <C>
Total operating income for reportable segments $ 19,082 $ 12,922
Unallocated software amortization costs (6,139) (5,550)
-------- --------
Operating income/(loss) $ 12,943 $ 7,372
======== ========
<CAPTION>
Six months ended
June 1999 June 1998
--------- ---------
Total operating income for reportable segments $ 37,303 $ 26,024
Unallocated software amortization costs (12,279) (10,146)
Unallocated in-process R&D costs - (39,440)
-------- --------
Operating income/(loss) $ 25,024 $(23,562)
======== ========
</TABLE>
There are no intercompany sales between geographic areas. All sales are
from external customers.
Note 5. Depreciation and Amortization
Property and equipment is stated net of accumulated depreciation of $32.4
million and $33.0 million at June 30, 1999 and December 31, 1998, respectively.
Additionally, software, goodwill and other intangibles are stated net of
accumulated amortization of $140.3 million and $127.8 million at June 30, 1999
and December 31, 1998, respectively. Depreciation and amortization expense for
the three months ended June 30, 1999 and 1998 was $8.8 million and $8.3 million,
respectively. Depreciation and amortization expense for the six months ended
June 30, 1999 and 1998 was $17.0 million and $14.7 million, respectively.
8
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company provides scalable, integrated, enterprise-level mechanical
computer-aided design solutions that are used for virtual product development
principally in the automotive and transportation, aerospace, consumer products,
equipment and machinery, and electronics industries. For further information,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
The Company generates revenue primarily from the licensing of mechanical
CAD/CAM/CAE and product data management (collectively "MCAD") software products,
and the provision of software consulting, support services and computer
equipment to users of the Company's products. The Company operates business
units in the United States and in 29 other countries. The Company's software
products are licensed to customers through the Company's direct sales force and
by specific arrangements with certain distributors, value-added resellers and
other marketing representatives.
Pursuant to a reorganization consummated as of January 1, 1998 (the
"Reorganization"), the Company became the successor to the MCAD business of
Electronic Data Systems Corporation, a Delaware corporation ("EDS"), which
business was formerly operated within several business units of EDS. The
Company's historical financial statements reflect the results of operations,
financial condition and cash flows of the Company as a component of EDS prior to
the Reorganization and may not be indicative of actual results of operations and
financial position of the Company subsequent to the Reorganization.
In 1996 EDS and GM signed the Unigraphics Software Corporate License
Agreement (the "EDS/GM Site License" or "Site License") for Unigraphics software
and related services. The Site License is a service agreement under the umbrella
EDS/GM Master Service Agreement pursuant to which EDS and its subsidiaries
(including the Company) provide information technology products and services to
GM. The Site License is a three-year arrangement that consists of three
elements: (1) a perpetual license of the Unigraphics software for up to 10,000
seats; (2) maintenance for the installed software; and (3) a specified upgrade
to be delivered by a non-Unigraphics business unit of EDS on a when-and-if
available basis. The contract did not require any significant modification or
customization of the software. The contract price was approximately $178
million, of which approximately $110.3 million was attributed to the software
license element, approximately $64.3 million was attributable to maintenance
support and approximately $3.7 million was attributed to the specified upgrade.
Revenue related to the specified upgrade was not recorded by the Company since
such upgrade was delivered to the customer by a non-Unigraphics business unit of
EDS. The license fee is payable over three years in monthly installments of
approximately $3.1 million. Maintenance revenue is recognized over the term of
the agreement based generally on the deployment schedule. The Company recognized
Site License software license revenue of approximately $110.3 million in 1996.
GM and the Company currently are in the process of negotiating a renewal of
the Site License ("Renewal"), which expired in June 1999. In the interim, the
current Site License has been extended on a month-to-month basis at monthly
maintenance fees in effect at the end of June 1999. The Renewal under
negotiation comprehends a three year agreement covering primarily software
maintenance services. Also, because of the spin-off of Delphi Automotive
Systems, Inc. from GM, a separate agreement between Delphi and the Company for
similar on-going services is being negotiated. In the interim, ongoing software
maintenance and other services are being provided by the Company to Delphi under
the month-to-month extension of the Site License.
In connection with the Reorganization, EDS and the Company entered into
the GM Subcontract pursuant to which the Company receives the revenue and
performs substantially all of EDS' obligations under the Site License subsequent
to the Reorganization. Less than 10% of the Company's revenues for the quarter
ended June 30, 1999 were attributable to the products and services provided to
GM and Delphi Automotive Systems, Inc. under the Site License and other
agreements. If the EDS/GM Master
9
<PAGE>
Service Agreement and a similar agreement between EDS and Delphi Automotive
Systems, Inc. were to be terminated, or if the Company (as a subcontractor to
EDS or otherwise) and GM and Delphi do not enter into successor agreements
to the Site License, the Company's financial condition and results of operations
would be materially adversely affected.
In connection with the Reorganization, effective as of January 1, 1998, the
Company entered into a Management Services Agreement with EDS pursuant to which
EDS performs various management services for the Company, including treasury,
risk management, tax and similar administrative services. The agreement provides
for the payment of fees to EDS for such services, either on a fixed price or
usage basis, which fees are generally designed to approximate EDS' cost of
providing the services, as well as a fixed fee equal to .5% of the Company's
total revenues. The Management Services Agreement will expire on December 31,
2002 unless terminated earlier by either party if EDS and the Company are no
longer under common control. Except for certain tax and treasury management
services relating to consolidated operations or corporate policy of EDS, which
the Company is required to purchase during the term of the Management Services
Agreement, the Company or EDS may terminate any service on or after January 1,
2000 with prior notice of not less than five months, or earlier if the parties
mutually agree. The Company paid EDS $6.4 million for such services in 1998, and
currently is negotiating with EDS relative to the 1999 services and charges. For
the six month period ended June 30, 1999, EDS has invoiced the Company
approximately $3.8 million for services provided during such period. The actual
amount owing to date is subject to change based upon the agreements reached
between EDS and the Company. There can be no assurances that the charges the
Company negotiates will, in the aggregate, be lower than the aggregate of
charges the Company might be able to negotiate with third party suppliers of
such services.
Pursuant to the Intercompany Credit Agreement dated January 1, 1998 between
the Company and EDS entered into in connection with the Reorganization (the
"Intercompany Credit Agreement"), the Company is required to borrow from EDS,
and EDS is required to lend to the Company, amounts required by the Company to
fund its daily cash requirements. Since the closing of the initial public
offering of the Company's Class A Common Stock referred to below, the maximum
amount available to the Company under this facility is $70 million. Effective as
of March 6, 1998, the Company issued to EDS as a dividend an Intercompany Note
in the principal amount of $73 million (the "Intercompany Note"). As of June 30,
1999 approximately $8.5 million remains payable under the Intercompany Note. See
"Liquidity and Capital Resources" for further discussion.
On June 23, 1998, the Company completed the initial public offering of
5,000,000 shares of its Class A Common Stock, $.01 par value per share. The net
proceeds of the offering were used to repay $65.1 million of indebtedness
outstanding under the Intercompany Credit Agreement.
Solid Edge Acquisition
On March 2, 1998, the Company completed the Solid Edge Acquisition for a
purchase price of $105 million (excluding approximately $2 million of
acquisition costs). The Company borrowed $105 million from EDS pursuant to the
Intercompany Credit Agreement. The cost of the Solid Edge Acquisition was
allocated to identifiable assets based on estimated fair values. Costs allocated
to identifiable intangible assets will be amortized on a straight-line basis
over the remaining estimated useful lives of the assets. Costs allocated to in-
process research and development in the amount of $39.4 million were expensed in
the three month period ended March 31, 1998. The excess of purchase price over
fair value of identifiable assets acquired was recorded as goodwill and will be
amortized on a straight-line basis over its useful life of seven years. The
Company has allocated the purchase price as follows: $3.4 million to software;
$4.0 million to acquired workforce; $39.4 million to in-process research and
development costs; and $60.2 million to goodwill.
Financial performance for the Solid Edge product since the acquisition has
been consistent with the projections utilized in the allocation of the purchase
price for the Solid Edge Acquisition.
Forward-looking Statements
10
<PAGE>
All statements other than historical statements contained in this Quarterly
Report on Form 10-Q constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Without limitation,
these forward-looking statements include statements regarding expected future
declines in hardware revenues, future income gains to be realized from the
exercise of warrants and subsequent sale of related marketable securities, the
Company's Year 2000 exposure, the Company's exposure resulting from the
introduction in 1999 of a new currency (the "euro") in certain European
countries, and the sufficiency of liquidity and capital resources over the next
twelve months. Any Form 10-K, Annual Report to Shareholders, Form 10-Q or
Form 8-K of the Company may include these and other forward-looking statements.
In addition, other written or oral statements which constitute forward-looking
statements have been made or may in the future be made by the Company, including
statements regarding future operating performance, short- and long-term revenue
and earnings growth, the value of new contract signings, and MCAD industry
growth rates and the Company's performance relative thereto. These forward-
looking statements rely on a number of assumptions concerning future events, and
are subject to a number of uncertainties and other factors, many of which are
outside the Company's control, that could cause actual results to differ
materially from such statements. These include, but are not limited to:
competition in the MCAD industry and the impact of such competition on pricing,
revenues and margins; market acceptance of new Company product or service
offerings and costs associated with the development and marketing of such
offerings; the financial performance of current and future customer contracts;
the cost of attracting and retaining highly skilled personnel; the ability of
the Company to successfully integrate its operations into a single, effective
and efficient entity; and the significant quarterly fluctuations in the
Company's operating results caused by, among other factors, the timing of orders
and shipments. Such factors are described in more detail in the Company's most
recent Annual Report on Form 10-K beginning on page 21.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future events
or otherwise.
Results of Operations
Revenues. Revenues were $110.4 million during the three months ended June
30, 1999, an increase of $8.5 million from $101.9 million for the corresponding
period in 1998. Revenues were $216.2 million during the six months ended June
30, 1999, an increase of $27.8 million from $188.4 million for the corresponding
period in 1998.
Software revenues increased $9.1 million, or 24%, to $47.7 million for the
three month period ended June 30, 1999, from $38.6 million for the corresponding
period in 1998. Software revenues increased $18.1 million, or 26%, to $88.3
million for the six month period ended June 30, 1999, from $70.2 million for the
corresponding period in 1998. The increase for the three month period resulted
from strong sales performance in all geographic areas, particularly in the
Americas and Europe. The increase for the six month period resulted from strong
sales performance, particularly in the Americas and Europe, and the addition of
the Solid Edge/EMS product line.
Services revenues increased $10.0 million, or 22%, to $56.4 million for the
three month period ended June 30, 1999, from $46.4 million for the corresponding
period in 1998. Services revenues increased $24.9 million, or 30%, to $109.2
million for the six month period ended June 30, 1999, from $84.3 million for the
corresponding period in 1998. The increases resulted from software maintenance
growth in all geographic areas, particularly Europe and Asia Pacific,
corresponding with the higher software sales activity.
As planned, hardware revenues decreased $10.6 million, or 63%, to $6.3
million for the three month period ended June 30, 1999, from $16.9 million for
the corresponding period in 1998. Hardware revenues decreased $15.3 million, or
45%, to $18.7 million for the six month period ended June 30, 1999, from $34.0
million for the corresponding period in 1998. All geographic areas experienced
decreases for both the three month and six month periods. The Company expects
hardware revenues to continue to decline and to become a smaller portion of its
business.
11
<PAGE>
Revenues from international operations represented 52% and 54% of total
revenues for the three months ended June 30, 1999 and 1998, respectively.
Revenues from international operations represented 51% and 52% of total revenues
for the six months ended June 30, 1999 and 1998, respectively.
Gross Profit. Gross profit was $71.5 million during the three months ended
June 30, 1999, an increase of $13.7 million from $57.8 million for the
corresponding period in 1998. Gross profit was $135.7 million during the six
months ended June 30, 1999, an increase of $27.9 million from $107.8 million for
the corresponding period in 1998. Gross profit margin was 65% and 57% for the
three months ended June 30, 1999 and 1998, respectively, and 63% and 57% for the
six months ended June 30, 1999 and 1998, respectively.
Gross profit on software revenues increased $4.4 million, or 15%, to $33.1
million for the three month period ended June 30, 1999, from $28.7 million for
the corresponding period in 1998. Gross profit on software revenues increased
$10.1 million, or 19%, to $62.5 million for the six month period ended June 30,
1999, from $52.4 million for the corresponding period in 1998. The increases
resulted primarily from strong revenue growth that more than offset both an
increase in royalty costs, particularly from higher Product Vision revenues, and
the amortization of goodwill and software intangibles arising from the Solid
Edge Acquisition.
Gross profit on services revenues increased $11.2 million, or 42%, to $37.7
million for the three month period ended June 30, 1999, from $26.5 million for
the corresponding period in 1998. Gross profit on services revenues increased
$20.2 million, or 41%, to $69.9 million for the six month period ended June 30,
1999, from $49.7 million for the corresponding period in 1998. The increases
resulted from increases in revenue and improved margins on professional
services.
Gross profit on hardware revenues decreased $1.9 million, or 73%, to $0.7
million for the three month period ended June 30, 1999, from $2.6 million for
the corresponding period in 1998. Gross profit on hardware revenues decreased
$2.5 million, or 43%, to $3.3 million for the six month period ended June 30,
1999, from $5.8 million for the corresponding period in 1998. This is a
continuation of the trends of lower finders fees, a change in the mix of
hardware sales to lower margin computers and lower overall volume resulting from
reduced emphasis on selling hardware.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $41.8 million during the three months ended June
30, 1999, an increase of $6.9 million from $34.9 million for the corresponding
period in 1998. Selling, general and administrative expenses were $77.1 million
during the six months ended June 30, 1999, an increase of $15.0 million from
$62.1 million for the corresponding period in 1998. Selling, general and
administrative expenses represented 38% and 34% of total revenues for the three
months ended June 30, 1999 and 1998, respectively, and 36% and 33% of total
revenues for the six months ended June 30, 1999 and 1998. Selling costs comprise
salesperson salaries, commissions and benefits, travel, sales office occupancy
and other related costs. The higher selling expenses resulted from increases in
commissions and bonuses because of continued strong sales growth over 1998 and
increased staffing to support higher revenue growth. The higher general and
administrative expenses resulted from the transition to SAP and the rollout of
the Company's new employee benefits plans.
Research and Development Costs. Research and development costs were $16.7
million and $15.6 million for the three months ended June 30, 1999 and 1998,
respectively. Research and development costs were $33.6 million and $29.9
million for the six months ended June 30, 1999 and 1998, respectively. Research
and development costs as a percentage of total revenues were 15% for the three
months ended June 30, 1999 and 1998, and 16% for the six months ended June 30,
1999 and 1998. The increase in research and development costs resulted
principally from the Solid Edge Acquisition and support of initiatives related
to the Company's IMAN and ProductVision software products.
In-Process Research and Development Costs. In-process research and
development for the six months ended June 30, 1998 includes the write off of in-
process research and development costs of $39.4 million associated with the
Solid Edge Acquisition in the first quarter of 1998.
12
<PAGE>
Operating Income (Loss). Operating income was $12.9 million and $7.4
million for the three months ended June 30, 1999 and 1998, respectively.
Operating income (loss) was $25.0 million and $(23.6) million for the six months
ended June 30, 1999 and 1998, respectively.
Other Income (Expense), Net. Other income (expense), net was $1.3 million
and $(2.0) million for the three months ended June 30, 1999 and 1998,
respectively. Other income, net was $3.5 million and $7.7 million for the six
months ended June 30, 1999 and 1998, respectively. The increase for the three
months ended June 30, 1999 in other income (expense), net resulted from reduced
interest expense and an increase in the gain realized from the sale of
marketable equity securities. The decrease for the six months ended June 30,
1999 in other income, net resulted from differences in the amounts of gain
realized from the sale of marketable equity securities. These securities were
obtained through the exercise of warrants in the quarter ended March 31, 1998.
The warrants were received in exchange for reduced royalty fees from a private
software company that was acquired by a public company in 1997. The Company
anticipates that additional gains on similar transactions will continue to be
reflected in its results of operations in the third quarter of 1999. The amount
of such gains will be dependent on existing market conditions at the time of
sale. Interest expense associated with the intercompany loan was $0.2 million
and $0.6 million for the three months and six months ended June 30, 1999,
respectively.
Provision for Income Taxes. The provision for income taxes was $5.1 million
and $1.9 million for the three months ended June 30, 1999 and 1998,
respectively. The provision for income taxes was $10.3 million and $(7.2)
million for the six months ended June 30, 1999 and 1998, respectively. The
Company's effective tax rate was 36.0% for the three months ended June 30, 1999
and 1998, and 36.0% and 45.1% for the six months ended June 30, 1999 and 1998,
respectively. The Company's effective tax rate was higher than normal in the
first quarter of 1998 as a result of the write-off of in-process research and
development costs discussed above.
Net Income (Loss). Net income for the three months ended June 30, 1999, was
$9.1 million compared to $3.4 million for the corresponding period in 1998. Net
income (loss) for the six months ended June 30, 1999, was $18.3 million and
$(8.7) million for the corresponding period in 1998. Basic and diluted earnings
per share of common stock was $0.25 and $0.11 for the three months ended June
30, 1999 and 1998, respectively. Basic and diluted earnings (loss) per share of
common stock was $.50 and $(0.28) for the six months ended June 30, 1999 and
1998, respectively.
Recent Accounting Pronouncements. Statement of Financial Accounting
Standards (SFAS) 133, Accounting for Derivative Instruments and Hedging
Activities, which was issued in June 1998, establishes accounting and reporting
standards for derivative instruments and hedging activities. Under SFAS 133,
derivatives are recognized on the balance sheet at fair value as an asset or
liability. Changes in the fair value of derivatives are reported as a component
of other comprehensive income or recognized as earnings through the income
statement depending on the nature of the instrument. In June 1999, the FASB
issued SFAS 137 Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB
Statement No. 133, which defers the effective date of SFAS 133 from fiscal years
beginning after June 15, 1999 to fiscal years beginning after June 15, 2000.
Initial application should be as of the beginning of an entity's fiscal quarter;
on that date, hedging relationships must be designated and documented pursuant
to the provisions of SFAS 133, as amended. Earlier application of all of the
provisions is encouraged but is permitted only as of the beginning of any fiscal
quarter that begins after the issuance date of SFAS 133, as amended.
Additionally, SFAS 133, as amended, should not be applied retroactively to
financial statements of prior periods. The Company is currently evaluating the
requirements of SFAS 133, as amended, to determine its potential impact on the
consolidated financial statements.
Liquidity and Capital Resources
The Company's central cash management function is performed by EDS. The
Company has an Intercompany Credit Agreement with EDS under which there was no
amount outstanding at June 30, 1999. The
13
<PAGE>
maximum amount that the Company may borrow at any time from EDS under the
Intercompany Credit Agreement (and certain other credit agreements between EDS
Finance PLC, a wholly-owned subsidiary of EDS, and certain non-U.S. subsidiaries
of the Company) is $70 million. Amounts outstanding under the Intercompany
Credit Agreement bear interest, payable quarterly at a rate equal to one-month
LIBOR plus 0.5%. The Intercompany Credit Agreement restricts the Company from
obtaining financing from any party other than EDS without written consent from
EDS, unless EDS fails to provide funding available to the Company under the
Intercompany Credit Agreement. The Intercompany Credit Agreement terminates on
December 31, 2002, unless terminated earlier at the election of one of the
parties upon occurrence of certain events, and requires that the Company lend to
EDS all excess cash of the Company at a rate of one-month LIBID minus 0.5%.
The Company also has outstanding an Intercompany Note in the principal
amount of $8.5 million payable to EDS on March 6, 2001. The Intercompany Note
bears interest, payable semiannually, at a rate equal to one-month LIBID minus
0.5%.
The Company's net cash provided by operations for the six months ended June
30, 1999 increased $0.5 million to $50.9 million from $50.4 million in the
comparable period in the prior year. The Company's net cash used in investing
activities for the six months ended June 30, 1999 decreased $91.7 million to
$9.2 million from $100.9 million in the same prior year period. The decrease
resulted primarily from cash payments made in the first quarter of 1998 in
connection with the acquisition of the Solid Edge product line. Cash flows
provided by (used in) financing activities decreased $114.0 million to $(46.5)
million for the six months ended June 30, 1999 from $67.5 million in the six
months ended June 30, 1998. This reflects $65.1 million of proceeds received
from the Company's initial public offering of Class A Common Stock during 1998,
as well as decreases in cash borrowings from EDS. The Company believes currently
available sources of liquidity, including the Intercompany Credit Agreement and
cash generated from operations, will be sufficient for its operations for at
least the next twelve months.
Year 2000
The Year 2000 ("Y2K") problem refers to the concern that many existing
computer programs may fail to accurately process date information beyond the
year 1999 because such programs do not properly recognize and/or process years
that begin with "20" instead of the familiar "19."
With respect to the Company's current software product offerings, the
Company believes that its product offerings are "Year 2000 compliant." The
Company has conducted Y2K compliance reviews of Company-developed code for the
current versions of Unigraphics, IMAN, Parasolid, Solid Edge and EMS software
and believes this software to be compliant. Additionally, regarding third-party-
supplied software contained within, or offered in conjunction with, Company-
developed software, the Company has either tested such code for Y2K compliance
or has received assurances from third party suppliers that such code will be
compliant prior to the Year 2000.
Regarding the installed base of Company-supported software products,
customers using older software product versions which are found to be non-
compliant, in most cases, can purchase upgrades that are Y2K compliant. However,
customers who have written their own programs that manipulate, calculate, store
or display dates represented as two digits may need to modify such internal
programs to avoid Y2K problems.
While there can be no assurances that the Company will not be exposed to
potential claims resulting from software product problems associated with the
Y2K problem, the Company does not currently believe that the effects of any Y2K
non-compliance in the Company's current software products or in the Company's
installed base of software will result in any material adverse impact on the
Company's business or results of operations.
The Company, in conjunction with its parent EDS and separately, is in the
process of reviewing, remediating, upgrading, and/or acquiring new internal
business systems and services, including the implementation of the SAP
enterprise resource planning software system. In accordance with the Management
Services Agreement between the Company and EDS, the Company will continue using
certain business systems of EDS in the near
14
<PAGE>
term. The business systems of EDS utilized by the Company principally include
those that EDS has identified as "mission critical" systems, such as payroll,
accounts receivable, accounts payable, tax administration and corporate
administration. The Company has been advised by EDS that through June 30, 1999,
EDS had completed assessment, renovation, testing, and implementation of all of
its mission critical projects.
EDS and the Company have also identified other projects related to the
Company which are deemed to be non-mission critical. Non-mission critical
systems include non-IT systems such as elevator operations, HVAC, and security
systems. The Company believes that such system failures would not materially
impact the business. Many of the non-mission critical projects will not be
remediated for Y2K compliance for one or more reasons including retirement of
the system and redundancy with other systems, among other reasons. EDS and/or
the Company plan to complete the remediation process for most non-mission
critical projects identified for remediation by the end of the third quarter of
1999. The remediation of certain non-mission critical systems may extend into
the fourth quarter of 1999.
Concurrently with EDS' remediation of mission-critical and other systems
used by the Company, the Company has implemented in the United States enterprise
application software systems that have replaced many EDS mission critical
systems. Such Y2K compliant enterprise application software packages, including
general ledger, accounting, accounts payable and receivable, payroll, and
others, were implemented in April 1999 in the United States. Certain new
financial and other systems also will be installed in Canada, Germany and the
United Kingdom during 1999. The Company plans to phase in new enterprise systems
in its other non-U.S. operations during and after 1999. If implementation of any
such new internal system were delayed, the Company would rely on remediated EDS
or Y2K compliant previous Company systems until such time as new systems can be
installed. The Company had planned to install such new enterprise systems
regardless of the Y2K problem; therefore, costs associated with these new
systems have not been reflected in the costs associated with addressing the
Company's Y2K issues.
The Company also is in the process of reviewing for Y2K compliance other
unique, internal business systems not included in the EDS systems or the new
enterprise systems mentioned above. Systems being reviewed include certain end
user hardware, operating systems and applications, server hardware and software,
telecommunications hardware, software and services, and other Company
applications. Y2K reviews and remediation of most of these systems and services
used in the United States have been completed. Y2K reviews of such systems and
services used at international locations are in progress. In many cases
compliance has been achieved by installing upgrades or revisions provided by
third parties in accordance with existing agreements. In other cases, compliance
has been achieved through Company remediation efforts or planned technology
refresh purchases.
Finally, with respect to suppliers and vendors of key products and
services, in many cases the Company acquires such products and services using
existing EDS purchase arrangements. The Company understands that EDS has queried
its vendors regarding Y2K compliance. Using the results of its contacts with
suppliers, EDS has compiled a database listing thousands of products and
services and indicating which items are compliant. The Company has relied on
this information in an attempt to ensure that certain items acquired from third
party suppliers pursuant to EDS purchase agreements are Y2K ready. Although the
Company cannot be certain that all mission critical and non-mission critical
supplier products and services are Y2K ready, the Company will continue to study
and evaluate the Y2K compliance of key vendors.
The costs incurred by the Company to achieve Y2K compliance have been
expensed as incurred. Costs incurred to make EDS' systems Y2K compliant will be
paid by EDS; however such costs may be reflected in charges EDS bills to
internal users such as the Company. The Company does not expect to incur
significant additional costs to make its internal hardware and software systems
Y2K ready. At this time, the Company
15
<PAGE>
estimates the historical and future costs of remediation and planned technology
upgrades or replacements are not more than $500,000.
The Company believes the worst case scenario would be the Company's
inability to effectively implement the enterprise application software coupled
with any unanticipated Y2K failure of EDS-remediated mission critical internal
systems upon which the Company would have to rely until the enterprise system is
implemented. If these events were to occur, the Company would have to rely, in
part, on manual processes or reinstallation of older systems resulting in
increased costs and perhaps a material adverse impact on overall financial
performance.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union adopted the "euro" as their common legal currency and established fixed
conversion rates between their existing sovereign currencies and the euro. The
euro now trades on currency exchanges and is available for non-cash
transactions. The existing sovereign currencies will remain legal tender in the
participating countries during the transition period ending on January 1, 2002.
Beginning on that date, the participating countries will issue new euro-
denominated currency for use in cash transactions and the existing sovereign
currencies will no longer be legal tender. The Company operates in the countries
which have adopted the euro ("Eurozone") and in most of the other countries of
the European Union that initially are not participating in the euro conversion.
In the near term, EDS will continue to provide many internal systems
services to the Company (including purchasing, accounting, and billing system
services) throughout Europe under the Master Services Agreement between EDS and
the Company. Since January 1, 1999, EDS has been providing systems with the
capability to trade with customers and suppliers in the euro currency. The
Company has been informed that, by the fourth quarter of 1999, EDS'
European systems will be updated to provide for dual reporting in euro currency
and to allow migration from the existing currencies to the euro over the
following two-year period. Concurrently, the Company is in the process of
replacing and upgrading many of the internal systems currently provided by EDS.
The new Company systems are planned to be operational throughout Europe on or
before January 1, 2002, the end of the euro transition period, and will
accommodate business in euros. Assuming timely upgrade of current systems and
implementation of relevant replacement systems, the Company does not expect to
incur any material incremental costs to update current systems or to install new
systems having euro-related functionality. Although the Company currently has no
reason to believe that relevant system improvements will be not be timely
implemented, a failure to timely install internal systems to handle business in
euros could have a material impact on the Company's financial condition or
results of operation.
Within the Eurozone, the Company prices its products on an individual
country basis. Effective January 1, 1999 the Company established, and
periodically thereafter during the transition period the Company will establish,
product prices and has quoted and will quote such prices in both local
currencies and the euro. The pricing in euros for similar products and services
is not expected to be identical in the different countries; however the price
differentials are not expected to be significant, thereby minimizing any
negative competitive impact as a result of pricing transparency. At this time,
the Company does not believe the conversion will have a material adverse impact
on its competitiveness in Europe. However, the Company will continue to analyze
euro-related developments; and there can be no assurance that the euro-
conversion program will not have a material adverse effect on the Company's
financial condition or results of operations.
Impact of Changes in Exchange Rates
The Company's results of operations can be affected by changes in exchange
rates. Revenue received and expenses paid in currencies other than the U.S.
dollar are translated into U.S. dollars for financial reporting purposes based
on the average exchange rate for the period. During the six months ended June
30, 1999, international revenue represented 51% of total Company revenue. The
Company's most significant international operations are located in Germany and
the United Kingdom, which comprised 26% and 13%, respectively, of total
international revenue for the six months ended June 30, 1999. Foreign revenue
and costs are generally received
16
<PAGE>
and paid in the local currency. Historically, foreign currency transaction gains
(losses) have not had a material effect on the Company's operations.
Inflation
Historically, inflation has not had a material effect on the Company's
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has market risks primarily relating to changes in the value of
marketable securities and changes in foreign exchange rates. The Company has
entered into various agreements for the purpose of hedging against these risks.
The hedging agreements are in the form of puts and calls which establish the
lowest and highest prices that the Company may sell the securities. These
agreements expire at various dates through 1999. The Company does not enter into
financial instrument transactions for trading purposes. Additional information
about the Company's risk related to changes in foreign exchange rates is
contained in Item 2., "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under "Euro Conversion" and "Impact of
Changes in Exchange Rates."
17
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
UGS' 1999 Annual Meeting of Shareholders was held on May 19, 1999 in
Bridgeton, Missouri. A total of 4,423,774 Class A Common Shares and 31,265,000
Class B Common Shares (approximately 99.8% of all shares entitled to vote at the
meeting) were represented by proxy or ballot at the meeting. The matters voted
upon at the meeting, and the votes cast with respect to each, were:
(i) Election of two Class I directors for a term expiring at the 2002
Annual Meeting of Shareholders: John A. Adams -- 317,056,317 shares cast for
election and 17,457 shares withheld; John J. Mazzola -- 317,061,064 shares
cast for election and 12,710 shares withheld. The terms of the following
directors continued after the meeting: J. Davis Hamlin, Jeffrey M. Heller,
Gary B. Moore, Leo J. Thomas and William P. Weber.
(ii) Stockholder proposal regarding approval of the Unigraphics Solutions
Inc. Employee Stock Purchase Plan. 315,956,507 shares cast for the proposal,
14,670 shares cast against the proposal and 3,800 shares abstained. There were
1,098,797 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Restated Certificate of Incorporation of Unigraphics Solutions Inc.,
incorporated herein by reference to Exhibit 3.1 to Amendment No. 1 to
the Registration Statement on Form S-1 of the Company (File No. 333-
48261).
3.2 Amended and Restated Bylaws of Unigraphics Solutions Inc., as amended,
incorporated herein by reference to Exhibit 3.2 to Amendment No. 1 to
the Registration Statement on Form S-1 of the Company (File No. 333-
48261).
27 Financial Data Schedule (for SEC information only)
(b) Reports on Form 8-K
None.
18
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized and in his capacity as Chief Financial
Officer.
UNIGRAPHICS SOLUTIONS INC.
------------------------------------------------
(Registrant)
By /s/ Douglas E. Barnett
------------------------------------------------
(Douglas E. Barnett, Vice President,
Date: August 10, 1999 Treasurer and Chief Financial Officer)
19
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 15,897 16,793
<SECURITIES> 3,408 12,024
<RECEIVABLES> 100,671 112,710
<ALLOWANCES> 5,685 5,196
<INVENTORY> 0 0
<CURRENT-ASSETS> 123,458 141,984
<PP&E> 61,284 58,909
<DEPRECIATION> 32,431 37,038
<TOTAL-ASSETS> 234,964 254,824
<CURRENT-LIABILITIES> 124,209 104,070
<BONDS> 8,511 74,962
0 0
0 0
<COMMON> 363 363
<OTHER-SE> 101,881 75,428
<TOTAL-LIABILITY-AND-EQUITY> 234,964 254,824
<SALES> 53,960 55,523
<TOTAL-REVENUES> 110,350 101,901
<CGS> 33,251 24,245
<TOTAL-COSTS> 38,863 44,081
<OTHER-EXPENSES> 58,544 50,448
<LOSS-PROVISION> 422 21
<INTEREST-EXPENSE> 200 1,993
<INCOME-PRETAX> 14,223 5,379
<INCOME-TAX> 5,118 1,936
<INCOME-CONTINUING> 9,105 3,443
<DISCONTINUED> 0 0
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<NET-INCOME> 9,105 3,443
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